Europe crisis could cause major damage: Geithner

U.S. banks and money funds cut European exposure ‘substantially’

By

RonaldD. Orol

WASHINGTON (MarketWatch) — A severe crisis in Europe could cause significant economic harm by undermining confidence and weakening demand, but the United States has limited exposure to the situation, Treasury Secretary Timothy Geithner said Thursday in response to a barrage of questions about concerns there.

Major U.S. banks and money-market funds have “substantially reduced their exposure” to European economies that are under the greatest pressure, he said at a Senate Banking Committee hearing.

“Our institutions hold substantial cushions of capital against the potential risks they might face ahead, but that is something we have to keep monitoring closely,” according to Geithner.

He was also asked whether the United States was seeing a Lehman Brothers Holdings Inc.
LEHMQ
collapse situation emerge with a major U.S. financial institution, such as Morgan Stanley
MS, -0.59%
and its exposure to Europe. Worries about the investment bank’s potential vulnerability to Europe have emerged recently.

Geithner quickly answered: “Absolutely not. The direct exposure of the U.S. financial system to the countries under most pressure in Europe is modest.”

The Treasury secretary made the comments in the context of concerns about some European economies, including Greece. The heavily indebted Mediterranean nation is at the center of financial-market worries that it will default on its debt obligations.

The Senate committee hearing was called to discuss recommendations made in July by a newly formed Financial Stability Oversight Council to contain future economic crises, and to limit a repeat of issues stemming from the 2008 financial crisis. However, Geithner was inundated with questions about Europe, a controversial consumer-protection bureau and about efforts to help troubled homeowners refinance and avoid foreclosure. Geithner also responded to similar questions before a House Financial Services Committee in the afternoon.

Geithner said the United States cannot compel Europe to act, but he added that Americans have a strong stake in seeing them act more forcefully. He noted that Europe has taken advantage of swap lines provided by the Federal Reserve.

“The cost of resolving this are not large relative to the resources of Europe, and they have committed at the highest levels to hold the system together and make sure they protect their broader banking system, and they recognize they need to do more to make that credible and we have an interest in them doing that,” Geithner commented.

To limit the impact on the United States, Geithner said it was critical that Congress approve President Barack Obama’s jobs bill, which he said would raise economic growth by 1% to 2% and help create 1 million to 2 million new jobs.

Separately, he said officials are watching very closely the broad financial linkages between the U.S. markets and Europe.

Geithner’s comments come as the Bank of England announced another round of quantitative easing on Thursday, stunning currency markets. Quantitative easing refers to the policy of hiking the money supply by buying assets like government and corporate bonds. Read more about the Bank of England’s quantitative easing.

Systemic risk, consumer protection

Lawmakers in both the House and Senate hearings raised concerns that the FSOC has yet to designate nonbank companies in the United States as so-called “systemically significant financial institutions,” which will be required to hold more high-quality common equity.

Geithner declined to comment on how many nonbank companies would likely be designated systematically significant. He said the FSOC will meet next week to consider proposing a “piece of guidance,” that if adopted would lay out a framework for making judgements about which companies will be designated.

“We had a financial crisis that was caused in significant part by the fact that this country allowing a huge amount of risk to build up outside the banking system without constraints on leverage, and without the basic protections that all financial systems require.”

Sen. Richard Shelby, an Alabama Republican and the ranking member of the Senate committee, squabbled with Geithner about the White House’s nominee to head a new consumer-protection bureau.

Shelby reiterated the position of himself and 43 other Republicans, who have said they won’t back any nominee to head the bureau unless structural changes are made, such as creating a panel instead of a one-person director.

Geithner asked Shelby to reconsider and take time to meet with the nominee, former Ohio Attorney General Richard Cordray. In response, Shelby asked Geithner to change his mind.

“I’m optimistic you’ll change your mind,” Geithner said.

“Don’t be,” Shelby retorted.

The exchange came after the Senate Banking Committee, in a partisan vote, approved Cordray earlier on Thursday to head the newly formed Consumer Financial Protection Bureau. Twelve Democrats voted for Cordray and 10 Republicans, including Shelby, voted against him.

Geithner argued that a failure to conform Cordray will “leave a vast array of nonbank financial institutions, consumer-finance companies outside the scope of consumer protection.” He added that such a “mistake” left the United States vulnerable to the crisis that took the economy to the brink in 2008.

Refinancing

The Obama administration will provide some details in the next few weeks about a series of proposals to help “a meaningful” number of homeowners participate in a government program that provides refinancing to current low interest rates for so-called “underwater” borrowers, Geithner said in response to Democrats raising concerns that the program was not forthcoming. (Underwater borrowers owe more than their homes are worth.)

“It strikes me as strange a bit that on something so important in terms of the huge tsunami of foreclosures we’re facing that we still don’t have details,” said Sen. Jeff Merkley, Democrat of Oregon.

Geithner reported that Federal Housing Finance Agency director Ed DeMarco is examining a set of proposals to make it much easier for people to refinance at lower rates — including those who have homes that are worth less than their outstanding mortgage obligations.

However, Democrat lawmakers at the House hearing said they were upset that another Treasury program to help homeowners avoid foreclosure haven’t helped more borrowers. Rep. Luis Gutierrez, Democrat of Illinois, said the Treasury hasn’t employed enough of $50 billion in taxpayer funds allocated to a Home Affordable Modification Program that seeks to help troubled borrowers modify mortgages.

“Basically the homeowners didn’t get very much from the HAMP program,” he commented.

Geithner responded that the number of people eligible for HAMP was a much smaller fraction than “everyone expected.” Gutierrez countered that only roughly $2 billion of those funds have been allocated.

The Treasury secretary also backed a new global agreement for big bank capital, known as Basel III, saying it will be sufficient to make sure U.S. and international banks have sufficient capital and liquidity to withstand future crises. Critics contend that regulators for banks based outside the U.S. will ultimately require lower capital levels, driving business to their institutions.

“There is a competitiveness problem if the capital markets march off to London,” said Rep. Ed Royce, Republican of California.

Geithner highlighted a section of the report that scrutinized new financial products such as exchange-traded funds, pointing out that “a robust financial system should encourage and foster innovation, but not at the expense of overall financial stability.”

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